The Senate and the CEOs: panto at its worst

And so this is Christmas. Time for the pantomime perp-walk that is the annual hearing for Oversight of Wall Street Firms by the United States Senate Committee on Banking, Housing, and Urban Affairs.

Senators from both sides of the aisle typically line up to chuck rocks at each other – and some at the banks too. Many leave the room as soon as they have had their speaking slot – why stay? Chairing the entertainment is Senator Sherrod Brown, Democrat of Ohio.

Now for the bankers. In they troop, the usual identity parade. Do any of them look like the person who stole your wallet, ma’am? Yes, I know. They do all look rather alike, although you may notice that one of them is at least wearing green. Yes, that’s right, the one in a dress.

Come on then, let’s hear what you have to say. No, not the eight bank CEOs in the dock (sorry, in Hart Senate Office Building 216, having graciously given up three hours on the morning of December 6), but the real stars of the show, chair Brown and the ranking Republican, Senator Tim Scott of South Carolina.

And we’re off. These are “eight of the most powerful people in the country”, according to Brown. But that power carries responsibilities, and that is why the US needs strong capital rules. That and all that stuff back in March.

And in case any of the bank bosses were tempted to argue that more capital requirements would mean they would have to reduce “good loans” to hard-working Americans, Brown was here to tell everyone it was nothing to do with that.

It was actually because they preferred to make more money from “the risky stuff”.

Bank lobbyists (boo, hiss) had been trying to drum up opposition to the proposed final Basel III implementation in the US – what the industry calls, with delicious finality, the “Endgame” (pipe down at the back, Omid Scobie, we’ve heard enough from you in the last few weeks).

It seemed scarcely believable to Brown that the industry that had brought the country to its knees in 2008 and had nearly done so again in March 2023 might have the temerity to argue against a 25% wholesale increase in regulatory capital requirements for the biggest banks.

In response, it seemed scarcely believable to Scott that Brown could defend such a badly thought-through proposal. These good folk in front of us, who had done so much for the country, should not be having to deal with some shoddy point-scoring politically driven nonsense like the Basel III Endgame.

Did no Democrat understand just how damaging to the economy, to the life chances of ordinary Americans, the Basel III Endgame would be?

With those pleasantries out of the way, it was over to the CEOs. But first, the whole truth! Of course, that is why we are here. Nothing but, remember? So, let’s have those hands up for the cameras. No, not both hands, they aren’t being arrested, ha ha ha.

Not yet.

Charles Scharf at Wells Fargo went first, with Bank of America’s Brian Moynihan staring at Scharf’s script as if to check he was reading his words right. After a typically earnest Moynihan delivery came the usual whirlwind from Jamie Dimon at JPMorgan, then Citi’s Jane Fraser, State Street’s Ronald O’Hanley, BNY Mellon’s Robin Vince, Goldman Sachs’s David Solomon and Morgan Stanley’s James Gorman.

TLDR: their firms had all done wonderful things. They had supported the American economy. They had been honoured to help stabilise the financial system during the unfortunate events at a few badly run little banks in March 2023 – how wonderful to be part of the solution this time around.

Most importantly of all, their people – sorry Brian, their teammates – were nothing short of heroic. They could not be prouder of them.

But this regulatory craziness needed to stop. Jamie knew it. Jane knew it. James knew it. Even David knew it – and he has had a lot on his mind of late.

This will be the last of these occasions that Gorman will have to sit through. Next time it will be Ted Pick lining up for the ritual abuse. It is perhaps just as well: when Solomon began reading his own opening statement, Gorman – sitting next to him and waiting to be the last to speak – could not have looked less interested.

He made up for it when he did get his chance, looking and sounding positively furious at the prospect of higher capital requirements, jabbing his finger and menacing the tabletop with his hand.

Then it was back to Brown for the start of the 'questioning'. The idea that this annual event is any kind of serious attempt at learning anything useful is as farcical as the proceedings themselves, of course. And so we had more theatrics as he asked any chief executive who felt their bank could not meet the increased capital requirements to… yes, raise their hand.

No one did. The world learned so much.

Scott got his own chance to ask questions soon enough, and he was quick to put Brown straight on what he should have asked. What he wanted to know was whether anyone could meet the capital requirements “without negative consequences”. Ah ha!

Dimon was shocked – shocked – that more work to assess the likely impact of such a big increase in capital had not been done beforehand: “We’ve had 10 years – it’s shocking to me.”

Fraser agreed with Scott that the unintended consequences would indeed stretch to farming and other rural communities, who rely on commodity hedging that uses derivatives that will now cost much more.

Solomon added that farmers are not the only real economy players hedging – airlines are hedging jet fuel, utilities are hedging gas. And he was also keen to let senators know about securities financing transactions (SFTs), whereby pension funds earn cash for lending their securities to firms like Goldman. Capital requirements for that kind of deal are going up eight times, said Solomon.

There were more theatrics to come. Since Chairman Brown had got the ball rolling with requests for hand-raising, Senator Mike Rounds, Republican of South Dakota, took it and ran with it.

Would the Basel III Endgame as proposed harm first-time homebuyers? Eight hands. Those saving for retirement? Yep. Farmers and ranchers? Check. Small business owners? You betcha.

Decorum was briefly restored by the more sedate Senator Jack Reed, Democrat of Rhode Island, who was keen to assess the CEOs’ support in principle for a national limit of 36% on the interest paid by consumer borrowers. Such a limit was brought in for active servicemen and women via the Military Lending Act (MLA) back in 2006 and there are proposals now to extend it nationwide for all lending.

One by one they agreed with the intent, with State Street and BNY Mellon doing so while noting they had no activity in that business.

Then came Solomon. Apparently, Goldman has “a very, very small business in the consumer area,” he began. Ha ha ha – someone give that man a prize for the LOLs. Is there a story behind that "very, very small consumer business"? Someone should write that.

In case anyone might think there was much purpose to the committee hearing beyond performative grandstanding on both sides of the aisle, Senator Thom Tillis, Republican of North Carolina, was there to put them straight. At times, he didn’t even pretend to want to know what the CEOs actually thought.

Thank goodness, he said, that none of them were the heads of “an organization that’s had an exposé of a culture of sexual harassment and workplace hostility”, because otherwise all the senators would be calling for their resignation. “But we’ve got a top financial regulator that gets a pass.

“I don’t expect you to respond to that.”

That was probably wise, but anyone wondering what he was referring to would do well to look up the recent questioning by the Senate Committee of Martin Gruenberg, chairman of the Federal Deposit Insurance Corporation (FDIC), following damning reporting of the institution by the Wall Street Journal.

At that session, Gruenberg had said he was “personally disturbed and deeply troubled” by the report. That didn’t wash for Republican Senator John Kennedy, who told Gruenberg that “you and your colleagues ought to hide your heads in a bag”. It was excruciating.

Back to the bank chief executives, and next up for Senator Tillis were cybersecurity reporting regulations that ransomware companies – imagine that! – were now exploiting. He brandished bits of paper that looked like news reports, presumably of the recent odd situation that saw ransomware operation AlphV itself file a complaint to the US Securities and Exchange Commission (SEC) that MeridianLink, a company it had just hacked, had failed to report the hack in a timely fashion.

That particular reporting requirement does not actually take effect until later this month, but no matter, Tillis is keen for it to be repealed as soon as possible.

“These people are out of control,” he said. But he didn’t want the CEOs to respond to this either.

Finally, on to the Endgame, and here he did invite answers, although the CEOs looked like they might have said it all already. Did it make sense? Gorman said it made no sense. Was there any kind of study that Tillis had missed examining the potential impacts of raised requirements? No answer.

He wanted Solomon to explain SFTs again. Banks borrow securities from pensions, pensions can invest that cash, banks would exit that business if capital requirements went up eight times. This was sounding familiar.

Tillis had heard all sorts of nasty rumours that people could game stress tests. He used to work at PricewaterhouseCoopers and didn’t remember there being a unit there dedicated to helping people game stress tests. Could anyone game stress tests? Anyone?

Cue Jamie: “I’ll take this one”.

Well of course, who else? Stepping up to the plate again. One moment he’s buying Bear. Next, he’s buying First Republic. Now he’s taking another for the team, daring to speak out against the Comprehensive Capital and Analysis Review (CCAR). Anyone would think he was planning a move into government.

CCAR was 200,000 pages, Jamie reminded us. “That thing is out of control.”

Nailed it.

Senator Bob Menendez, Democrat of New Jersey, wanted us to know just how important the Consumer Financial Protection Bureau (CFPB) was in holding the banking sector accountable. Just look at how much customer redress it had got out of the chief executives' banks!

Let’s ask them: Jamie, how much for JPMorgan? Oh, he doesn’t know. Well, it’s $360 million. Moynihan? Fraser? Scharf? It’s “amazing” that they don’t know, says Menendez, since it’s $819 million, $1 billion and over $2 billion, respectively. Even more amazing given that this critical agency is under constant attack, including right now.

In case you missed it, this was a reference to a case that has been grinding its way through the Supreme Court over whether the rather unique way in which the CFPB is funded – directly by the Federal Reserve, and so bypassing the usual appropriations process and the congressional oversight that comes with that – was unconstitutional.

On to Senator Kennedy, whose questioning started on an upbeat note. “Unlike some, I do not think you are crooks,” came his Louisiana drawl.

He was proud of the banks and the jobs they created. And he laid the blame for the March 2023 crisis squarely on the management of the banks that collapsed and the regulators whose job it had been to stop them doing “stupid stuff”.

Those included – no surprise – the FDIC. Kennedy used his time to air again some of the worst reports of behaviour within the FDIC that he and his colleagues had discussed at the earlier hearing. And then he wanted to know if Dimon found it ironic to be told how to run his business by such an organization.

Dimon – wisely, but perhaps surprisingly – didn’t take the bait. But he couldn’t resist bashing the broader regulatory push that had led to a huge transfer of activity outside the mainstream banking sector, including almost 80% of mortgage lending and almost half of leveraged lending.

Kennedy had weightier matters on his mind: how was it that the Endgame proposals didn’t simply violate the law? How could they be imposed on banks without specific Congressional direction? Citing the supreme court’s 2022 decision in West Virginia vs EPA, in which the court imposed restrictions on how the Environmental Protection Agency could regulate emissions, Kennedy argued that Basel III ought also to fall under the “major questions” doctrine.

A long, long pause.

Were they still processing the “not crooks” thing? Eventually Kennedy was out of time. “But Ms Fraser was about to answer!” he protested. Chairman Brown backed off.

Cut to Fraser, a grinning Jamie beside her. Was he wishing it was him? What could he add? It had all been said. Like he had scripted it!

Fraser played the diplomat. Jamie might have three times her return on tangible common equity, but she does measured response better than him. “We much appreciate your points of view on this topic Senator…”

Bankers love a chart, but Senator James Vance, Republican of Ohio, had one they would have hated on a stand next to him. Its title – 'Woke actions & commitments of the 8 US global systemically important banks' – let us know this was set to be a fair-minded discussion.

In Vance’s telling, the political system was “infecting” the financial system and vice versa. Bankers needed to grasp that the American people elected people like Senator Vance to do public policy, not them.

By way of example, Vance plucked out two of the most divisive issues: banks’ public criticism of a Georgia voter identification law and their approach to lending to energy companies.

He wasn’t picking on Moynihan, although his was “the only bank that has a red X on every single issue” on the chart. But he wanted to know why BofA had contributed to raising the price of energy in Ohio through policies like cutting off lending by 2025 to companies that generate 25% of their business from thermal coal.

He may have picked the wrong target here – Moynihan grew up in Ohio and noted that the policy Vance was referring to specifically related to mountain-top removal mining, taking the tops off the Appalachians and turning them into mines. He sounded like he believed passionately that people shouldn’t really be doing that.

It didn’t matter to Vance – banks should stay out of culture wars and that was that.

Moynihan might have been forgiven for feeling a little targeted throughout the session, but perhaps his institution’s name makes it somewhat inevitable. But he got a laugh out of the room too.

Senator Chris Van Hollen, Democrat of Maryland, wanted to know if the banks were enrolling in the FedNow real-time payments system, considered an important way to help particularly those customers in most need. He turned first to Moynihan: was American Express enrolling?

Brian looked puzzled. “American Express isn’t here. If you want them to come next time, that would be fine with us.” Smiles all round. We’re among friends, after all.

While he was at it, Van Hollen also wanted to get on record Dimon’s support for the abolition of the tax treatment loophole for carried interest, profits that accrue to general partners of investment funds and that have much more lenient treatment than personal income.

Unsurprisingly, given his frequent public pronouncements on the topic, Dimon agreed. It is only a week since he shared a stage with Bill Ackman at The New York Times DealBook Summit and told Ackman that he would make him pay more tax if he were president, saying that “this carried interest stuff would be gone the day I got in office”.

He got more airtime with Elizabeth Warren, Democrat of Massachusetts and someone by her own admission unlikely to be holding hands with bank CEOs. What she was most worried about was that criminals and terrorists were using cryptocurrencies to evade the law and finance the enemies of the United States.

This was music to Jamie’s ears. The only true use case for crypto was criminal, he said. “If I was the government, I would close it down.”

He seems to be talking a lot these days about what he would do in office.

After three hours, Brown brought questioning to an end, noting drily that the Committee would take under advisement a proposal to take over the FDIC that Dimon had tossed into one of his earlier responses. Some Christmas cheer there.

And not everything at the hearing had been unremittingly antagonistic. There was consensus on the need and willingness to do more to help American ex-servicemen receive their entitlements. Chairman Brown acknowledged the progress banks had made in increasing wages and benefits for frontline employees, and in reducing overdraft fees.

Brown even praised Dimon for his leadership in the campaign for reform of Supplemental Security Income (SSI), a benefits programme that has been barely changed for 40 years and which sets an asset limit for individuals at just $2,000 before they lose their entitlement. Both houses of Congress are working to change this.

There was agreement on the need to increase financial inclusion among marginalized communities. The importance of provision of affordable housing was raised by several senators, and the banks found it easy to agree. There was also consensus on the continuing efforts needed to ensure compliance with sanctions to prevent financing regimes that might wish the US harm.

But there was no avoiding the elephant in the room. Brown told banks they must stop lobbying against the kinds of regulatory measures that were designed to protect the taxpayers that ultimately stood behind their businesses.

That won’t happen. But it was Senator Vance’s line of questioning that went to the heart of how this debate is going to play out over the next year. If banks won’t stay out of Democrat-driven culture wars against the values of Republican voters, why should Republicans help banks push back on what they see as over-reaching regulation?

This is the fine line that Dimon, Fraser and their peers must tread. They might wish it was not so, but it is. If the Senate hearing served any purpose at all, it was that it hammered home the fact that what might seem like a technical regulatory discussion can be easily broadened by parties on both sides to encompass practically everything under scrutiny in banking.

The Basel III debate in the US will get much uglier before it reaches its Endgame.